'Financial markets are not fully factoring in the risk of renewed lockdown'

We expect both core, but particularly headline inflation, to rise during 2021, yet this should be a temporary move only, say Rabobank economists

JAN LAMBREGTS, managing director and global head of financial markets research, Rabobank International, WOUTER VAN EIJKELENBURG, their economist for Australia, New Zealand, India & ASEAN and RYAN FITZMAURICE, their energy strategist share their views on the road ahead for global financial markets with Puneet Wadhwa in an interview. Edited excerpts:

Global financial markets have been roiled by the recent turn of events in the bond markets. Is the selling overdone? By when do you see stability returning?

JAN: Equity markets broadly speaking still trade close to historic highs, so from that perspective there’s been little sustained selling, rather the buying has continued. Much of the turbulence is indeed in the global bond markets, where vaccination programs have seen economic optimism rise in the US and UK, and subsequently higher inflation expectations and rising bond yields. Europe’s been a laggard with regards to vaccinations, but through rising global yields has seen its share of higher rates as well.

We expect both core, but in particularly headline inflation to rise throughout 2021, yet this should be a temporary move only. Given the substantial amount of slack in global labor markets it’s very hard to see a sustained wage-price spiral. As such, we expect bond yields to come down again as well and remain at historically low levels.

Are the financial markets factoring in the sporadic relockdowns across cities across the globe?

JAN: I don’t think financial markets are fully factoring in the risk of renewed lockdowns across the globe in case of mutant strains or the vaccines proving less effective under any risk scenario.

How long will the global central banks remain in an ‘accommodative’ mode?

JAN: Nearly without exception, global central banks have made it abundantly clear they consider any inflationary spike following a recovery from Covid-19 to be temporary and plan to err on the side of caution and not raise rates in the upcoming few years. Next to that, many remain committed to asset purchase programs well into the future. All this makes for a powerful accommodative backdrop for the economic recovery.

Outlook for bond yields?

JAN: We see near-term upwards risks for bond yields. In the medium-to-long term, we expect bond yields to fall back as there’s too much slack in global labor markets and that should contain inflationary pressures.

Do you see investors /big money chase developed markets or emerging market equities for a better return?

JAN: The hunt for yield continues unabated, as global central banks’ very accommodative stance sees liquidity sloshing around in search for returns. Both developed and emerging equity markets can benefit from this search, albeit that in both cases it will depend on how they handle vaccinations and any recovery from Covid-19.

What are your economic projections for India?

WOUTER: We expect the Indian economy to grow at 11.3 per cent in fiscal year 2021-22 (FY22) as a result of a low base due to the pandemic year and continued economic recovery. Expect inflation to pick up through the year across the globe. This also holds true for India. Fiscal spending as announced in the FY22 budget is higher than we initially expected. Higher commodity prices and elevated consumer demand on the back of economic recovery will lead to higher inflation. We already see the first signs of higher inflation due to lower base and increased commodity prices that led to, for example, higher fuel prices in February. Too much additional monetary stimulus might push inflation levels even higher. The Reserve Bank of India (RBI) is likely to leave interest rates unchanged in their next meeting.

Do you expect prices of agri commodities to inch up as economic recovery gathers pace and people get back spending power?

JAN: Although the speculative appetite for agri commodities may seem exaggerated, it is hard to see it going down too much. Low interest rates, potential further fiscal stimulus packages, good global demand (not so much for the plate but for storage and animal feed), and potential adverse weather are likely to sustain high prices in agri commodities through 2021. Should the US' ultra-loose monetary and fiscal policy produce significant US inflation, or stagflation, and / or yield curve control to peg the long-term cost of borrowing, Wall Street would again likely increase its agri-commodity inflation hedges.

Where do you see oil headed?

RYAN: We do see further upside risks to oil and energy prices developing as the economic recovery gathers pace in the coming months. In fact, we expect to see a surge in travel-related fuel demand this summer as the vaccine rollout continues at a rapid pace and given the strong pent up desire for travel following a year of varying lock-down conditions. In addition, we also expect this coming demand surge to be rather price inelastic given all of the stimulus programs at play coupled with historically high personal savings rates. Furthermore, widespread inflation fears and fears of a weaker US Dollar are contributing to very strong investor demand for commodity index products this year, thereby creating more speculative buying pressures in the oil markets.